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Speculative Behavior and Heterogeneous Expectations: Theory and Evidence

  • Cheolbeom Park


    (National University of Singapore)

This paper demonstrates that the optimal willingness to pay for a stock is the payoff from holding the stock for one period when investors have different expectations, and that the willingness to pay can be represented as the sum of the expected present value of future dividends and the expected present value of the gap between the future equilibrium price and willingness to pay. This speculative behavior based on the awareness of heterogeneity in expectations is supported by the volatility test and the predictability of the dispersion in expectations across investors.

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Paper provided by National University of Singapore, Department of Economics in its series Departmental Working Papers with number wp0205.

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Length: 38 pages
Date of creation: 2002
Date of revision:
Handle: RePEc:nus:nusewp:wp0205
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  1. Chen, Joseph & Hong, Harrison & Stein, Jeremy C., 2002. "Breadth of ownership and stock returns," Journal of Financial Economics, Elsevier, vol. 66(2-3), pages 171-205.
  2. Aditya Kaul & Vikas Mehrotra & Randall Morck, 2000. "Demand Curves for Stocks "Do "Slope Down: New Evidence from an Index Weights Adjustment," Journal of Finance, American Finance Association, vol. 55(2), pages 893-912, 04.
  3. N. Gregory Mankiw & David H. Romer & Matthew D. Shapiro, 1989. "Stock Market Forecastability and Volatility: A Statistical Appraisal," NBER Working Papers 3154, National Bureau of Economic Research, Inc.
  4. Karl B. Diether & Christopher J. Malloy & Anna Scherbina, 2002. "Differences of Opinion and the Cross Section of Stock Returns," Journal of Finance, American Finance Association, vol. 57(5), pages 2113-2141, October.
  5. Stephen Morris, 1996. "Speculative investor behavior and learning," Working Papers 96-5, Federal Reserve Bank of Philadelphia.
  6. De Long, J Bradford & Andrei Shleifer & Lawrence H. Summers & Robert J. Waldmann, 1990. "Noise Trader Risk in Financial Markets," Journal of Political Economy, University of Chicago Press, vol. 98(4), pages 703-38, August.
  7. John Y. Campbell, 1990. "A Variance Decomposition for Stock Returns," NBER Working Papers 3246, National Bureau of Economic Research, Inc.
  8. Whitney K. Newey & Kenneth D. West, 1986. "A Simple, Positive Semi-Definite, Heteroskedasticity and AutocorrelationConsistent Covariance Matrix," NBER Technical Working Papers 0055, National Bureau of Economic Research, Inc.
  9. Takatoshi Ito, 1988. "Foreign Exchange Rate Expectations: Micro Survey Data," NBER Working Papers 2679, National Bureau of Economic Research, Inc.
  10. Owen Lamont, 1998. "Earnings and Expected Returns," Journal of Finance, American Finance Association, vol. 53(5), pages 1563-1587, October.
  11. John Y. Campbell, Robert J. Shiller, 1988. "The Dividend-Price Ratio and Expectations of Future Dividends and Discount Factors," Review of Financial Studies, Society for Financial Studies, vol. 1(3), pages 195-228.
  12. Graham Elliott & Takatoshi Ito, 1998. "Heterogeneous Expectations and Tests of Efficiency in the Yen/Dollar Forward Exchange rate Market," Discussion Paper Series a347, Institute of Economic Research, Hitotsubashi University.
  13. repec:tpr:qjecon:v:92:y:1978:i:2:p:323-36 is not listed on IDEAS
  14. Robert J. Shiller, 1980. "Do Stock Prices Move Too Much to be Justified by Subsequent Changes in Dividends?," NBER Working Papers 0456, National Bureau of Economic Research, Inc.
  15. Fama, Eugene F. & French, Kenneth R., 1988. "Dividend yields and expected stock returns," Journal of Financial Economics, Elsevier, vol. 22(1), pages 3-25, October.
  16. Andrew Ang & Geert Bekaert, 2001. "Stock Return Predictability: Is it There?," NBER Working Papers 8207, National Bureau of Economic Research, Inc.
  17. Jones, Charles M. & Lamont, Owen A., 2002. "Short-sale constraints and stock returns," Journal of Financial Economics, Elsevier, vol. 66(2-3), pages 207-239.
  18. Hodrick, Robert J, 1992. "Dividend Yields and Expected Stock Returns: Alternative Procedures for Inference and Measurement," Review of Financial Studies, Society for Financial Studies, vol. 5(3), pages 357-86.
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